European Union regulators opened an extensive investigation on Wednesday into the way 11 EU governments subsidise utilities to ensure against blackouts, concerned that such support schemes may breach state aid rules.

Capacity mechanisms are used in some EU countries, such as Britain and France, to fund electricity generation that may not be cost-effective, but is needed to guarantee supply during peak demand.

Capacity mechanisms reward power companies – mainly gas and coal stations – for the amount of power they can produce, rather than by buying the energy they actually generate.

The European Commission said it would ask Belgium, Croatia, Denmark, France, Germany, Ireland, Italy, Poland, Portugal, Spain and Sweden for information on existing schemes or their plans to set up one.

It will also seek details from electricity generators, suppliers and network operators. A draft report is expected around the end of the year and a final report in mid-2016.

“This sector inquiry sends a clear signal to member states to respect EU state aid rules when implementing capacity mechanisms, and contributes to the Commission’s goal to build a true Energy Union in Europe,” European Competition Commissioner Margrethe Vestager said.

The sector inquiry aims to consolidate the Energy Union’s objectives of secure and affordable energy supplies by ensuring that capacity mechanisms are competitive and market-based, the Commission said.

Energy Union

New legislation on capacity markets is part of the executive’s plan to create an EU-wide Energy Union, a strategy to bolster the bloc’s resistance to shortages.

Energy Union is also a response to the Russian threat to EU gas supplies. The majority of Russian gas imports to the EU, about 30% of its annual needs, goes through Ukraine. In 2009, Russia turned off the taps, causing shortages in the EU.

Earlier drafts of the Energy Union suggested the Commission will legislate to fully open capacity mechanisms to cross-border investment.

In 2015 to 2016, it will publish an initiative to co-ordinate capacity markets. A review of the directive concerning measures to safeguard electricity supply security will begin in 2016, the paper said.

Commission Vice-President Maroš Šef?ovi?, in charge of Energy Union, has told EurActiv he was still open to cross-border investment in capacity mechanisms.

But the Commission’s communication on Energy Union said capacity mechanisms should only be developed to address security of supply if a need was proved. Any assessment should also take into account the potential for energy efficiency.

Supporters of capacity mechanisms claim the model can prevent blackouts, enabling the surplus capacity to be brought online in case of a shortage or to cover consumption at peak time.

Critics counter that paying for surplus, unused power is a public subsidy for high-carbon industries, entrenching polluting fossil fuel stations for years to come.

“This is a big and very welcome move, said Jonathan Gavanta, of environmental think tank E3G. “All too often national capacity mechanisms are used to prop up creaky old fossil fuel plants and to protect the interests of incumbent utilities – at significant cost to consumers and with little benefit for security of supply.”

Improving energy efficiency and developing better interconnections would give greater energy security than simply giving money to existing generators, he added. The investigation should look at at whether capacity mechanisms are discriminating against demand side options and interconnections, as well as whether certain companies were being favoured.

But it was a shame that the UK was not included in the probe, Gavanta added. Britain held a capacity auction last year, which includes giving support payments to keep 9.2 GW of old coal plants online, according to E3G.

This is the second sector-wide investigation launched by Vestager following the probe into e-commerce announced last month. Inquiries into the pharmaceutical, banking and energy industries in recent years led to cases brought against several companies.

Positions

“Greenpeace welcomes this investigation into what are often thinly-disguised subsidies for fossil fuel power plants. Burning coal is cooking the climate and causing disease and premature death. Instead of throwing polluting power companies a lifeline, Europe should be phasing out coal and replacing it with renewable energy and energy efficiency,” said Tara Connolly, EU energy policy adviser.

Industry group Eurelectric, which represents companies such as Germany's E.ON, RWE and Italian energy group Enel, says capacity markets must be properly designed to be part of an EU-wide energy market. "We therefore urge policymakers to make sure that capacity markets go beyond national borders," Hans ten Berge, its secretary-general, said.

Oliver Joy, spokesman for the European Wind Energy Association, said, "At this time, we are seeing capacity mechanisms sprouting up across the EU, which are geared toward domestic markets. This does little to help integrate renewables, including wind energy, into our power systems in a cost-effective way.

"We must ensure that capacity mechanisms do not simply become a vehicle to keep idle or inefficient power plants online or hinder progress toward a higher share of renewables in the power mix. Furthermore, capacity mechanisms should not be seen as a substitute for investing in grid connections, increasing interconnection or impeding regional cooperation between member states.

"Most countries in Europe, struggling with ever-thinner budgets, are looking at how their power systems can come at a lower cost to industry and consumers. However, governments should not assume that security of supply requires domestic peak capacity to meet every last MWh hour when facing a case of extreme peak consumption. Member states should consider taking a more holistic and pan-European approach to security of supply, as laid out in the energy union, where interconnection, cross-border cooperation and investment in the continent’s aging electricity grids are prioritised."

Background

"Capacity mechanism" describes a system in which power generation capacities are rewarded through financial compensation.

Supporters claim this model will prevent possible blackouts, such as on days with high demand and low wind and sun.

Under this model, compensation for secure supply is meant to help cover the costs of conventional power stations - mainly gas and coal.

Former EU Energy Commissioner Günther Oettinger has said he is critical of capacity mechanisms. "If the German government wants to take this path, then it must be a cross-border model. Otherwise it will become an undesirable cost driver," he warned.

Although capacity mechanisms are already on the daily agenda in many EU member states, Germany is still in the discovery phase

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Let’s hope the Commission takes into account the onset of energy storage in its analysis. Assuming distributed energy storage will proliferate over the next 5 to 10 years, it could to a significant extend – alongside dispatchable solar and wind – take over the role of carbon based capacity / demand response, eradicating emissions, and likely at much lower economic cost.